Johnson (pictured) and Crapo’s bill would unwind Fannie Mae and Freddie Mac and create a new explicit government backstop for the mortgage finance system.
Johnson (pictured) and Crapo’s bill would unwind Fannie Mae and Freddie Mac and create a new explicit government backstop for the mortgage finance system.

Housing market participants largely welcomed a critical bipartisan agreement on housing finance reform released Tuesday, viewing it as a serious effort to address an issue that has bedeviled policymakers for more than five years.

Senate Banking Committee Chairman Tim Johnson and Sen. Mike Crapo, the panel’s top Republican, offered an outline of a bill that would unwind Fannie Mae and Freddie Mac and establish a government backstop for the secondary mortgage market, which would be regulated by a new supervisor.

Their outline stuck closely to the structure and content of a bill offered last summer by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., but the committee leaders expected to offer more detail when it is formally introduced as early as the end of this week.

Below are three key takeaways from outline and what it means for the future of housing finance reform.

It’s a big step forward, even if participants want to see more details.

It’s nearly unheard of for a bill tackling this controversial an issue to be introduced on a bipartisan basis, much less with several members of both parties already expressing support for its basic agenda. That does not mean it has a smooth path to enactment, but it does give the bill significant momentum right out of the starting gate.

While stakeholders want more specifics on certain elements of the bill, many major players were applauding the preliminary agreement.

"We are pleased these principles and agreement reflect key reforms FSR has been advocating for, including a smooth transition to replacing the GSEs [government-sponsored enterprises] with the private market participants and better protection for taxpayers," said Tim Pawlenty, chief executive of the Financial Services Roundtable. "The time for reform is long overdue and we hope the broad, bipartisan support for the principles and agreement unveiled today helps propel action by the Senate."

Camden Fine, president and chief executive of the Independent Community Bankers of America, called the Senate effort "a strong step in the right direction," adding that it "contains many workable provisions for community bank mortgage lenders."

"ICBA will closely review and examine the final legislation when it is filed, but we are encouraged by what we see thus far," he said.

The Obama administration, which is said to be working with Banking Committee leaders, also lauded the preliminary bipartisan deal.

"The agreement reached by Senators Johnson and Crapo represents a good-faith compromise and they should be commended for their leadership. While maintaining their principles, both sides made difficult concessions in order to move this debate forward," Bobby Whithorne, a White House spokesman, said in a statement. "We support this effort and believe it is a workable bipartisan approach to complete the biggest remaining piece of post-recession financial reform."

Additional lawmaker support needed

Still, observers noted that the next big test for the legislative process will be a committee vote on the bill. Johnson and Crapo indicated that they hope to bring the legislation up for consideration in coming weeks. The Senate leaves for the spring recess on April 11, and observers have suggested that the committee leaders would like to get to the markup before that time, if possible.

"The next step will be a markup by the Senate Banking Committee, and the number of votes the bill gets at markup will be the next sign post," said Andrew Olmem, a partner at law firm Venable.

The Johnson-Crapo legislation is expected to start off in a very strong position, given that the prior Corker-Warner bill on which it is based already has 10 bipartisan sponsors on the committee, including the lead authors. Adding Johnson and Crapo to the mix gives the panel leaders a majority vote in the 22-person panel.

But for the legislation to attract the attention of Senate Majority Leader Harry Reid, who has previously expressed skepticism about GSE reform, the lawmakers will need to aim for a stronger vote out of the committee.

"I think the likelihood of being able to find a majority to support this effort is probable, but my own sense is for this bill to truly become the text that can move to the full Senate and then over to House, I think we need more than a simple majority—we need a strong majority in the committee," said David Stevens, president and chief executive of the Mortgage Bankers Association. "That outcome would give the greatest probability that Senate leadership would move the bill forward to a full vote on the floor."

Specifically, observers will be looking most closely at remaining Democrats on the banking panel to provide additional support for the measure. The unsigned lawmakers include Sens. Jack Reed of Rhode Island, Charles Schumer of New York, Robert Menendez of New Jersey, Sherrod Brown of Ohio, Jeff Merkley of Oregon and Elizabeth Warren of Massachusetts.

Warren, who has been one of the more vocal of the unsigned committee members on the issue, is slated to give a keynote address on Thursday at a major housing conference hosted by the National Community Reinvestment Coalition, a group of affordable housing advocates—and her remarks could provide additional insight into how the high-profile lawmaker is leaning. She earlier lauded the efforts by Corker and Warner, but has suggested that she has ongoing concerns about the need for low-income and middle-class families to have access to the system on top of dedicated affordable housing programs, among other issues.

More questions than answers

The preliminary agreement released by the Banking Committee provides a high-level breakdown of the pending legislation, though as with any effort of this scale, the devil will most certainly be lurking in the details.

The legislation would establish a new housing finance regulator, the Federal Mortgage Insurance Corp., which would provide an explicit government guarantee for certain mortgage-backed securities. It would allow for the creation of private firms to buy mortgages and sell those securities, but only after putting up 10% in first-loss capital before any government guarantee kicked in.

But there are questions on how that 10% first-loss capital will be structured and held, and to what extent the new regulator will have discretion in shifting that number, particularly in an economic downturn.

The plan also calls for the elimination of the GSE affordable housing goals, instead opting to establish a housing trust fund capitalized by a user fee of 10 basis points paid to the FMIC. This issue is likely to remain a key bone of contention for housing advocates and some Democratic lawmakers who warn that the system could fall short in providing for low- and moderate-income families in the absence of the goals.

"I’ve got to believe that’s going to be a sticking point," said Brian Gardner, a policy analyst at Keefe, Bruyette & Woods.

The FMIC would also establish standards for the securitization and underwriting requirements for loans that are part of any security. But those underwriting standards are also likely to be scrutinized. Johnson and Crapo deviated from the flat 5% downpayment requirement for all borrowers envisioned by the Corker-Warner bill by mandating just 3.5% for first-time homebuyers. The mortgages will also have to meet the Consumer Financial Protection Bureau’s definition of a "qualified mortgage," though it’s unclear from the outline whether or not there will be any departures from that requirement, particularly for first-time borrowers.

"The downpayment requirement has been advertised as the greatest obstacle to individuals trying to access credit, but it’s by far not the only one," said Brandon Barford, a partner at Beacon Policy Advisors. "The key thing I will be looking for is what the specific underwriting requirements will be and whether they will evolve alongside future CFPB changes to QM. The sum total of these underwriting standards is a key determinant of whether more or fewer loans are made and what percentage of loans will be getting government backing."

It’s also unclear from the principles outlined so far how the FMIC, which is based on a system like the Federal Deposit Insurance Corp., will interface with the other financial regulators and pre-existing regulations on capital and liquidity.

"Are they perpetuating the problem of regulatory arbitrage that helped exacerbate the financial crisis?" said Adam LaVier, a managing partner at Millstein & Co. "For the big banks issuing securities, like JPMorgan or Credit Suisse, is the primary supervisor the FMIC? The Fed? Are capital requirements harmonized? This informs where mortgage risk is going to move around the system."

Other issues to be closely examined include the plan for a transition away from Fannie Mae and Freddie Mac, including how those entities are dismantled, the structure and governance of a proposed small-bank mutual cooperative and how the multifamily market will be overseen under the new system.

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